The state of Arizona is not entitled to recover all of its Medicaid costs under the Indian Health Care Improvement Act, a federal appeals court ruled on Monday.

The state billed over $36 million to the Health Care Financing Administration, the federal agency that administers Medicaid. The state said it was entitled to recover 100 percent of its costs for providing health care to Medicaid-eligible Indian patients.

But the 9th Circuit Court of Appeals disagreed. In a unanimous decision, a three-judge panel said the IHCIA provision at issue was ambiguous so it deferred to the government's interpretation of the law.

The ruling means the only providers that are entitled to 100 percent reimbursement for Medicaid costs are the Indian Health Service and tribes that administer care at IHS facilities.

Otherwise, states like Arizona can recover just a percentage of their Medicaid costs for Indian patients. For the coming fiscal year, the rates -- known as federal Medicaid Assistance Percentages (FMAP) -- range from 50 percent to 74 percent, depending on the state.

The ruling also means urban Indian health care providers cannot receive 100 percent of their Medicaid costs. They are reimbursed at the same rate as their respective state.

Quoting the IHCIA, the 9th Circuit said "the costs eligible for a FMAP reimbursement
rate of 100 percent are 'limited to those 'received through' an IHS facility which offers, is responsible for and bills Medicaid for the services provided.'"

Even though the IHCIA has been on the books since 1976, the issue has only come up three times in the courts. The first two cases were from North Dakota and South Dakota and the states ended up losing both times.

The 9th Circuit arrived at the same outcome as the 8th Circuit in those cases. But the circuits disagreed on whether the IHCIA provision regarding Medicaid was ambiguous.

In a 2005 decision, the 8th Circuit said the legislative history for the IHCIA was "clear and consistent" with regard to the providers that are entitled to recover 100 percent of Medicaid services to Indian patients. "Nowhere does it suggest that the 100 percent FMAP applies to services provided outside of IHS facilities, such as the referrals at issue in this case," the court said.

The 9th Circuit, however, said the legislative history was not clear. So the court deferred to the Department of Health and Human Services' interpretation of which providers receive 100 percent reimbursement.

Congress is currently considering a reauthorization of the IHCIA. Tribal advocates have called for a provision to reimburse urban Indian health care providers 100 percent of their Medicaid costs.

The bill, however, has failed to pass for the last seven years due to objections from the Bush administration and Republican lawmakers. Last year, Senate Republicans blocked passage on the eve of consideration after the Department of Justice released an anonymous "white paper" objecting to numerous provisions.

This year, the Bush administration objected to extending health care benefits to urban Indians, certain Alaska Natives and lineal Indian descendants. The administration suggested that such programs might violate the U.S. Constitution because they are based on race.